DANIEL VAUGHAN: Housing costs continue to rise in this inflationary period

When it comes to inflation, the global supply chain problems typically get all the attention. That’s understandable, as various bottlenecks in the supply chain have ground the global economy to a halt in spots. But with early signs that some of those issues could be clearing up and analysts pivoting to a potential supply glut, that leaves one major area where prices continue to spike: housing.

The sudden increase in home appreciation, and value, has caused the federal government to step in and back mortgages at dramatically increased costs. 

The Wall Street Journal reports:

The federal government is about to back mortgages of nearly $1 million for the first time. The maximum size of home-mortgage loans eligible for backing by Fannie Mae and Freddie Mac are expected to jump sharply in 2022.

Currently, Fannie Mae and Freddie Mac are allowed to “back single-family mortgages that have balances as high as $548,250 in most parts of the country, and up to $822,375 in expensive housing markets, including parts of California and New York.” That’s changing.

“Those limits are expected to jump to a baseline level of about $650,000 in most jurisdictions and to just under $1 million in high-cost markets,” the Journal said.

This is because home prices have skyrocketed as part of the broader inflation trend across the country. Per the Journal: “Nationwide, the median single-family, existing-home sales price rose 16% in the third quarter to $363,700 from a year before, a record in data going back to 1968, the National Association of Realtors said Nov. 10.”

According to data from Redfin, in January of 2017, the average home price was around $250,000. Their current numbers match the Wall Street Journal’s analysis, saying that the average home price is about $375,000 now, which would mean a five-year price increase of approximately $125,000.

You can see those prices reflected in household debt. In the first quarter of 2017, housing debt accounted for a little over $9 trillion. The New York Federal Reserve reports that housing debt amounts to nearly $11 trillion and climbing.

That amount is higher than the previous spike in housing debt, which occurred at the peak of the housing meltdown in 2008, which set off the Great Recession.

Wages have risen over that period, but nothing like the increases seen in housing costs and every other sector of the economy now. CBS News reports that once inflation is factored, American wages have decreased over the last year:

Once inflation is accounted for — or “real wages” — average hourly earnings decreased 1.2% from October 2020 to October 2021, the Bureau of Labor Statistics said last week. Those wages represent income after accounting for the impact of rising prices and illustrate a person’s actual purchasing power.

By that measure, the typical American worker is worse off today than a year ago even though nominal pay — or income without any adjustments — is rising as fast as it has in years. But inflation is rising at an even steeper pace, with consumer prices increasing 6.2% in October from a year earlier. That represents the steepest monthly rise in about 30 years.

And so we sit with a situation where wages are floundering at best, inflation in all categories is rising, and housing debt is eating up more of everyone’s budgets. We can talk about the price of milk and beef all day long, but the most considerable expense for most people each month is housing, whether a mortgage or rent.

The demand for housing is so great that the need for manufactured homes hit a multi-decade high

The Journal reported:

The industry is on pace to deliver more than 100,000 new manufactured homes this year for the first time since 2006, according to the Census Bureau. The Biden administration has pointed to manufactured housing as one solution to the shortage of affordable homes.

Meanwhile, forgotten in the middle of the inflation and housing shortage are those on fixed incomes. Americans on Social Security, a pension, or something similar do not benefit from rising wages to help them. The White House and others have praised cost of living increases for next year, but the increased costs are happening now.

In short, housing is getting secondary treatment.

At the same time, everyone rides through this inflationary moment, but it’s one of the most critical factors. New houses aren’t arriving on cargo ships, and there are real restrictions based on zoning, supply, and more. And with wages falling, everyone will feel the hit from housing costs more and more as the new year arrives, new leases get signed, mortgages are approved, and more.

It’s also another issue that the Biden administration is not ready to deal with, at all.

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